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Offshore Banking — What It Is and When It Makes Sense

You probably live within a few minutes of at least one bank or credit union branch. If they can’t serve all your financial needs or you just don’t like them for whatever reason, you have literally hundreds of U.S.-based online and mobile bank accounts to choose from instead.

The vast majority of banking customers do just fine with one of these options or the other. But some go farther afield in search of the ideal banking partner. They park at least some of their cash overseas in institutions appropriately known as offshore banks.

Though relatively few Americans who live on U.S. soil have any need for it, offshore banking plays a crucial role in the global financial system and in the financial lives of many American citizens who live or do business abroad. Even if you’re not planning to open an international bank account anytime soon, it’s helpful to understand why offshore banking is a thing and when it makes sense to use. 

What Is Offshore Banking?

Offshore banking means banking in a country you don’t live in. Contrary to popular belief, it’s not a situation limited to the rich and unethical. If you’re an American who has a bank account in a country other than the United States, you have an offshore bank account.

Offshore banking makes it easier and less expensive for people who live or do business abroad to manage their international funds. 

American citizens living in other countries, known as expats, typically have bank accounts in their countries of residence as well as in the United States. So may Americans who operate businesses in foreign countries and American individuals who earn income abroad, especially if it’s denominated in a foreign currency.

Who Is Eligible for Offshore Banking?

Anyone is eligible to open an offshore bank account as long as they can prove they are who they say they are, fulfill any local regulatory requirements, and meet their chosen bank’s account opening requirements (such as making a minimum deposit). Depending on the bank’s policy, you may need a current residential or business address in the country where you plan to open the account.

Just because you can open a foreign bank account doesn’t mean you should. But it could make sense if any of these scenarios apply to you:

  • You live or own real estate in another country. Even if you don’t live abroad full-time, a local bank account can help you manage income and expenses earned abroad, potentially at lower cost. Many American retirees who own vacation homes abroad bank locally, as do digital nomads who spend some of the year in the U.S. and the rest elsewhere.
  • You frequently travel to the same country for business or are temporarily assigned to live there for work. Many U.S. government employees rotate between international postings. So do plenty of private-sector workers in industries like finance, logistics, energy, and manufacturing. If you’re in the same place long enough to stock a fridge and pay utility bills, a local bank account could be convenient.
  • You have significant investments or business interests in another country. If you own a business that owns assets or earns income in other countries, the company itself may need a bank account there. Depending on the company’s structure, you might need a personal account there as well.
  • You earn income in a foreign currency. If you’re a contractor or freelancer working abroad or with international clients who pay in their home currency, a foreign bank account could reduce your operating expenses and make it easier to access your earnings.
  • You often send money to relatives in another country. Western Union’s international wire transfer fees can add up quickly. Transferring funds directly to a foreign bank account you control is often cheaper, though it can take longer.

Benefits of Offshore Banking

Offshore banking is a matter of convenience for Americans living and working abroad. It can also have direct financial benefits, such as access to investment opportunities that aren’t available in the U.S. and reduced exposure to currency exchange rates.

1. Higher Liquidity & Convenience

An international wire transfer is the most reliable way to send money to most countries. But it’s expensive, often on the order of $30 to $50 per transfer, and can take several business days. Regulatory reporting requirements for larger transfers add time and hassle to the process.

If you need a local source of funds in a country where you spend lots of time or have business interests, an offshore bank account is more convenient and offers easier access to your cash when you need it. It’s especially useful if you’re employed abroad and get paid in the local currency. Many international businesses aren’t set up to pay into U.S. bank accounts. 

2. Asset Protection

Although you must comply with all applicable U.S. and local laws, an offshore bank account could shield some of your assets from U.S.-based creditors. An international bank account isn’t a practical liability shield for most regular Americans, but if you own a business that fails or experiences significant financial distress, it could make it more difficult for creditors to enforce judgments against you.

3. Higher Interest Rates

As in the United States, bank interest rates in other countries are influenced by (and often closely tied to) benchmark rates set by local central banks. And while local benchmark rates vary considerably, they’re often higher than in the United States. That means you could earn higher yields on offshore savings accounts, though taxes and currency fluctuations could reduce your net income somewhat.

4. Investment & Currency Diversification

Offshore bank accounts often come with access to local financial professionals and wealth managers, and more generally to investment opportunities not readily available to people based in the United States.

Relatedly, while the U.S. dollar is relatively stable, an offshore bank account denominated in another currency can reduce the impact of natural currency fluctuations. That’s especially important if you’re paid in a non-U.S. currency and don’t want to pay currency exchange fees on every paycheck or lose purchasing power if the U.S. dollar declines in value.


How to Open an Offshore Bank Account

Though policies and procedures vary from bank to bank, the process to open a bank account abroad should feel familiar if you’ve opened a bank account in the United States. Follow these steps:

  1. Choose your account type. Your ideal account type depends on your objectives for the account. If the aim is to save foreign income, an interest-bearing savings account is the best fit. If you’re paying day-to-day expenses out of the account, you need a checking account or its local equivalent.
  2. Make sure you’re eligible. Confirm that you meet the bank’s eligibility requirements. For example, some offshore banks might refuse your application if you have no current local address. If you’re trying to open a joint bank account with a spouse or domestic partner, make sure the bank allows that ownership type and that your co-owner meets eligibility requirements.
  3. Choose your currency. Generally, international banks denominate accounts in local currencies, but some use the U.S. dollar instead. If you earn income in a currency other than the U.S. dollar, a local-currency account could significantly reduce your foreign exchange expenses. 
  4. Gather proof of identity, residence, and possibly employment. Gather up your U.S. passport, government-issued ID (like a driver’s license), and proof of local residence or ownership if required. Ask the bank what else you need to prove your residence and identity, and if you need to verify local employment for regulatory or immigration enforcement purposes. Be prepared to get documents notarized or provide an apostille stamp, which might require a trip to the nearest U.S. embassy or consulate.
  5. Fund the account. If the bank has a minimum required opening deposit, you might need to set up a wire transfer from a U.S. bank account. If you already have funds in the bank’s home country, a local transfer is likely to be cheaper.
  6. Set up or transfer bills and deposits. Don’t transfer bills related to your personal or business activities in the United States, as paying those out of a foreign account is likely to be more expensive than from a U.S.-based account (if it’s even possible). But do set up or transfer bills charged by local vendors, like municipal utilities in the international city where you live, along with direct deposit from any local employers or other income sources.


Offshore Banking FAQs

Despite its exotic and vaguely dangerous reputation, offshore banking is a straightforward concept. These are some of the most common questions nonexperts have as they get up to speed on it.

Is Offshore Banking Illegal?

No, offshore banking is not illegal. 

There is some truth to the idea that offshore banking is popular with wealthy people seeking to avoid U.S. or foreign taxes or criminals interested in obscuring money flows across international borders. But there’s nothing inherently illegal or unethical about having a foreign bank account. 

It’s true that the Internal Revenue Service and other U.S.-based financial regulators closely monitor U.S. citizens’ overseas accounts for signs of tax evasion or other suspected criminal activities. Once your combined foreign bank account balance reaches $10,000, you need to file an annual disclosure with the IRS and may need to meet other regulatory requirements. 

If you plan to open an international bank account, consider consulting a U.S.-based tax professional who understands offshore banking rules.

What Countries Have Offshore Banking?

Any country that allows noncitizens to open a local bank account can be said to have offshore banking. In fact, by total account value, the United States is one of the world’s biggest offshore banking destinations for non-U.S. citizens thanks to its well-developed banking system, relative political stability, and the U.S. dollar’s status as the de facto currency of international business.

For Americans, top offshore banking destinations include low-tax Caribbean nations like the Bahamas and the Cayman Islands, U.K. crown dependencies like Jersey and Guernsey, and Switzerland (which has historically had strict financial secrecy laws). 

Can I Open an Offshore Bank Account Online?

It depends on whether your chosen offshore bank has an online application process open to nonlocals, but many international banks allow new customers to open accounts without visiting a physical branch. This is an important practical consideration if you’re looking to open an account in a new country ahead of your move there.

If it’s not clear from the website whether you can open an account online, call the bank’s business office and ask. To speed the process along, understand which identity- and asset-verification documents you’ll be asked to provide. 

Is Offshore Banking Worth It?

It depends on where you live, where you earn income, and other aspects of your life and financial situation. For many people, the answer changes over time.

Offshore banking often makes sense when:

  • You currently live or work in another country full-time.
  • You’re planning to move abroad.
  • You spend a significant amount of time in another country each year (for example, you own a vacation home outside the U.S. and spend winters there).
  • You own a business or real estate in another country.
  • You regularly travel abroad for business.
  • You earn significant income in a currency other than the U.S. dollar.
  • You support family members in another country.

However, there are no absolutes in offshore banking. If you meet one or more of these criteria but aren’t sure whether you really need an international bank account, ask your financial advisor, accountant, or another financial professional you trust.

Final Word

Offshore banking has a complicated reputation fed in part by a complicated history. Frankly, it sounds like something extraordinarily rich people who don’t play by the same rules as everyone else would do. And offshore banking is indeed integral to many multimillionaires’ and billionaires’ asset-protection strategies.

It’s also used and abused by international business people skirting (or outright violating) U.S. tax laws. That’s why the IRS is so strict about requiring disclosure for larger offshore bank accounts. The agency needs to know how much money individual U.S. taxpayers and corporations are hiding abroad, and where it is.

But offshore banking is also a legitimate financial activity done by hundreds of thousands if not millions of Americans with nothing to hide. 

Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he's not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.